Oct 5 Asia update & FT thoughts on US/China trade talks, China/Taiwan fly-bys, Property and EV's

05 Oct

This and previous notes can be found at Substack ( Asian Market Sense )
Check out ERI-C.com  for your research needs

Asian markets saw initial weakness but for the most part have rebounded .

Market trended lower at the open despite some good PMI data. Initial support around 7,240 prompted a bounce but then sold down to 7,200 at mid day, after which is worked higher, currently -35pts (-0.5%) @ 7,241.  Gold miners strong along with Energy names but Tech under pressure.  RBA kept rates unchanged as expected.
Hearing that China unloading Australian coal as crisis puts energy over politics
Construction Index Sept 53.3 vs 38.4 Aug (F/cast was 45.6)
Services PMI Sept 45.5 vs 42.9 Aug (F/cast was 44.9)
Composite PMI Sept 46.5 vs 43.3 Aug (F/cast was 46)
Balance of Trade Aug A$15.077b vs A$12.117b Jul (F/cast was A$9.9b
Exports Aug +4% MoM vs 5% Jul
Imports Aug -1% MoM vs +3% Jul
Job Advertisements Sept -2.8% MoMvs -2.5% Aug (Consensus was +0.7%)
Inflation Gauge Sept MoM vs +0.5% Aug
Retail Sales Aug MoM vs -2.7% Jul (F/cast was -1.7%)
RBA Interest Rate Decision no change
Weak retail SSS didn’t help along with CTA selling at the start.
Investors continue to rotate into growth +VE Commodites and Financials.  Tech weak.  Bargain hunting as long funds look to add to favourite names.  
Nikkei opened lower and sold down through the morning; finding support at 27,500 level with a slight uptick into lunch.  PM opened higher currently -529pts (-1.9%) 27,918
Topix traded in a similar fashion with support at 1,930; currently -18pts (-0.9%) 1,956
Data pre market
Tokyo CPI Sept +0.3% YoY vs -0.4% Aug (F/cast was -0.4%)
Tokyo Core CPI Sept +0.1% YoY vs 0.0% Aug (F/cast was +0.1%)
Services PMI Sept 47.8 vs 42.9 Aug (F/cast was 47.4)
Composite PMI Sept 47.9 vs 45.5 Aug (F/cast was 47.7)
S Korea 
Initial weakness as Forigner’s started as Sellers of Tech, Local Institutions started with broad Buying after the long weekend; covid re-opening names in focus. Pharma weak. ECommerce hearings getting underway. Autos -VE on weak sales.
Watch SEC (005930) -1.8% but due to report prelims on Friday 8 Oct.
Kospi opened below 3,000 and trended down to 2,940 before seeing support around 10:30am and then worked higher; currently -37pts (-1.3%) @ 2,980.
Kosdaq similar pattern; low 950, currently -15pts (-1.5%) @ 968
Data on Sept Inflation was expected pre market but delayed.
Taiex opened lower and sold down to 16,160 in the opening minutes, initially a small bounce andretested 16,160 but then worked better and now trading sideways around flat. Signs of Govt funds actively buying.
TSMC Chairman believes widespread IC chip hoarding judging from what has been shipped and end products produced. Sept Sales due Friday 8 Oct and analysts meeting next week 14 Oct.
LCD +VE as China’s power outages should curb the price declines; +VE AUO and Innolux.
China Closed re opens Friday
But CBIRC bans bank loans for luxury speculation and probing money flows into commodities
Pre market opened 23,772 -265pts vs -119pts ADR’s
Signs of margin selling initially coupled with Tech/Ecommerce weakness but then worked better, some signs of stress in the CBBC warrants but market closed in the green at lunch. The increased shorting over the past couple of days and thin trading prompting quick short covering.
China Property weak on news Fantasia failed to repay a bond and loan. Concerns more to follow.
Energy names leaders along with some HK Developers although it is expected that HK CEO Carrie Lam in her final address tomorrow will announce measures to increase Hong Kong’s housing supply.
Futures indicate a higher open  FTSE +20 points  at 7,033 and DAX +41 points at 15,083, CAC 40 +9 points higher at 6,491  according to IG data showed.
Services and Composite PMI, PPI.
Germany Services and Composite PMI, New Car Rgistrations
France Industrial Production, Services and Composite PMI,
UK  New Car Sales, Services and Composite PMI.
US Futures
Opened Dow +35pts, S&P +0.1% and NDX +0.2% and rose in early trades to Dow +45pts S&P +0.2%, NDX +0.3%  but now lower Dow -30pts S&P flat, NDX just +VE


Front Page
Price rises stir Turks’ unease

President Erdogan, whose government last month launched a probe into supermarket chains’ “unreasonable” food price increases, has blamed rising prices on “opportunists” in the retail sector.

US crude hits 7-year high after oil nations snub call to raise output
• Opec and allies stand firm • Tensions rise amid energy crunch • Inflation spectre looms.
Worth noting ‘Saudi Arabia, de facto Opec leader, eschewed its press briefing after the online meeting for the second month in a row, declining to explain its strategy.’
It also notes that OPEC members feel that the oil price is currently too low to make investment viable.

Severe depression relieved using brain implant hailed as ‘landmark success’
An interesting read about how doctors are brain mapping with some success but what it really shows is how little we really understand about how the brain works.

US claims China failing to honour trade deal

Beijing accused that it has failed to keep the agreement it made with the US ahead of the US trade rep holding ‘frank’ talks with Liu He to discuss the phase 1 deal.
It notes ‘Tai stressed in her first big China trade speech that the US did not want to “inflame trade tensions” with Beijing. But she said it had not adhered to all the purchase commitments it had made.
“It has stabilised the market, especially for US agricultural exports,” Tai said. “While commitments in certain areas have been met, and certain business interests have seen benefits, there have been shortfalls in others.”’
She went on ‘Tai said she would voice concern about issues beyond the 2020 agreement, as China proceeds to “pour billions of dollars into targeted industries and continues to shape its economy to the will of the state, hurting the interests of workers here in the US and around the world”.’
It also notes that the Biden administration is not intereted in joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership on concerns that it could spark a backlash ahead of the mid-tem elections.
With indications that China’s growth is slowing and the potential for that to be compounded by weakness in the Property sector; improving trade relations with the US could be crucial.

Evergrande fallout hits wider property market
Xi’s efforts to cool prices and developer’s debt woes ensnare tourism and homes project.
Takes a look at a project; Rice Wine Town, a stalled tourism and property project in Shaoxing, a city in China’s eastern Zhejiang province. The initial developer has collapsed so it needed a replacement. Sunac China stepped in andtook four lots at what appeared to be a bargain price. But that has changed in recent weeks as President Xi has made clear the impact of ‘Dual Circulation,’ ‘common prosperity’ coupled with debt crisis as Evergrande.
It is a combination of Evergrande’s financial mis management, covid and general slowing growth combined with a change in policy by President Xi. To be fair the ‘three lines policy’ had been in place for sometime but a number of developers had been slow to address the issue. A big part of the problem is that in a slow down developers are reluctant to cut prices because that usually results in protests from previous buyers; so they are limited in generating more sales; most of which are presales. That has now escalated bacause of evergrande a lot of buyers will not want to pay up front; putting more cashflow pressure on developers and the Centralised land sales programme.
In Sunac’s case as prices fell it was advised by the local authority to ‘write to the municipal government and local state bank branches last month to request “policy assistance”, according to people familiar with the project. The company and officials did not anticipate that this appeal for help would be leaked to fund managers and the media, triggering a 16 per cent fall in Sunac’s share price over two trading days and inviting speculation that it could be the next domino to fall after Evergrande.’
‘Sunac’s intention “was to have the government speed up the registration process in order to improve its cash flow, which was undermined by plunging sales in the wake of the Evergrande crisis”, said one of the people familiar with the negotiations. “Sunac was not asking the government for a bailout or tax breaks — just a normal business environment to operate in.”’
Sunac was lucky and its share price rebounded when it clarified the situation but longer term the issue still needs to be addressed and as it is construction activity, infrastructure the demand for the white goods that fill new flats will also decline.
September sales numbers are usually good ‘with holiday marketing campaigns over the annual mid-autumn festival. In a warning to investors on September 14, Evergrande said it expected a “significant continuing decline in sales” in September.’
Looking further out and bearing in mind President Xi’s intention to see money move out of property which for many years has acted as a sponge for cash; it is likely that there will also be a property tax. That will be further bad news for the developers. But longer term, if that means that China has a better tax base, it would put the country on a better footing. At present the dependance on Property is fraught; especially as President Xi wants China to focus on advanced manufacturing like Semiconductors. He needs cash to invest in what is a very expensive business to get into. So there is unlikely to be any relief for the developers. Today’s news that Fantasia (1777 HK) had failed to repay a bond and loan adds to the concerns. More are likely to follow.
See also Evergrande freezes shares amid rumours of unit sale
Looks at the speculation that it could sell its property management division; on of its most profitable units. The specualtion is that Hopson Development will be the purchaser. Interestingly Hopson’s 2023 bond fell from 95 cents to 91 cents on the dollar on the news.
Key is that it is not seeing interest in its developments; mainly because many have been pre-sold and hence hold more liability than profit.

Kim reopens North Korea hotlines to Seoul
The re-opening of communications is a positive step but unlikely to lead of any significant change in the current status quo.

Japan PM creates post to assess Beijing threat
New PM has created the new post of Minister for Economic Security. It will form strategies to counter China related risks on ‘semiconductor supplies, cyber security and intellectual property.’
The new PM noted “There appear to be moves to change the status quo by using force. The important stance for us is to be able to say what needs to be said to China.”
Regarding the rest of his Cabinet it suggests ‘his main priority was to reward the many LDP factions that supported him, resulting in important posts for allies of former prime minister Shinzo Abe and finance minister Taro Aso.’
A key role ‘Suzuki as finance minister suggests a continuation of aggressive monetary easing and fiscal stimulus, but it remained unclear who Kishida would ask to spearhead what he has called a new style of capitalism to focus on wealth redistribution.’
Key for him and his team now is winning the general election at the end of this month.

Volvo Cars to tap Polestar success with public listing
• Group’s valuation could top $30bn
• All-electric marque also set for IPO
An interesting read which will benefit Geely whose shares are +VE currently have opened lower.
See also LEX Volvo Cars: racing start
Volvo Cars’ rapid transition plan should allow it to achieve a similar rating as peers, even though it sells far fewer cars and is less profitable.
On a 10 times multiple of 2022 ebit, the carmaker would be valued at an enterprise value of $26bn, excluding its Polestar stake, according to Lex’s calculations. Success would tempt slower-moving rivals to follow its lead.’

Incursions in Taiwan air buffer zone stepped up by Beijing
An interesting read about how China in increasing its operations around Taiwan; comes as a number of navies carry out an exercise and a French mission visits Taipei.
Personally I think these actions are increasing the global support for Taiwan

Patience will be rewarded when investing in China by Jeffrey Kleintop chief global investment strategist at Charles Schwab
An interesting read. I do believe that patience will be rewarded in China but it needs to be accompanied by due diligence. Finding out those sectors that are in-line with the policy of President Xi.
But I think some of his reasoning is over simplified, for example whilst much of China’s borrowing is domestic it still releis on some external funding. Equally whilst the Chinese banks may not have used leverage and derivatives they have been creative in their handling of bad loans.
It is interesting that he concludes ‘High volatility is one reason why having a long-term perspective is important for emerging market investors. Longterm investors in emerging markets such as China know that patience may be rewarded with strong gains.’ His use of the phrase ‘may be rewarded’ sums it up.

EV revolution shifts from first to fifth gear
FT Series: After years of talk from carmakers, the industry is rapidly being transformed as many companies stake their future on electric vehicles and governments push drivers to get onboard.
Show the speed of change that is taking place.

Central banks must be alert to stagflation
Global economy still growing but supply chain disruption a worry.
Increasingly stagflation is being mentioned and the treat of it in the current circumstances is very real.
It concludes ‘Either way, central bankers need now to walk a tightrope and keep a close eye simultaneously on economic data, qualitative reports on supply chains and surveys of inflation expectations. Historical circumstances never repeat themselves perfectly and will provide, at best, an imperfect guide to the path of the economy over the years ahead. They do, however, provide an example of the steep costs of taking a mis-step.’

EU’s costly plan to close the semiconductor gap
Bloc would do better to focus on chip design and specialist machinery.
Worth a read trying to get into the mainstream is both costly and expensive as China is finding out. As the Editorial suggests better to find an area where you have a natural advantage.

For Interest
Opinion Change is needed in the next generation of economists By Diane Coyle  professor of public policy at the University of Cambridge and author of ‘Cogs and Monsters: What Economics is, and What it Should Be’
An interesting read. She concludes ‘Economics is changing and I am optimistic that the next generation will ensure that economists continue to deserve their influence. But the challenges we face are immense and urgent, so the sooner this change happens, the better.’
That could be said of a lot of professions.

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